History's highway paved with IOUs

Throughout history, wherever there's
been money, it has been borrowed.

The first money is thought to be cowrie shells, introduced
in China 3,200 years ago as a less cumbersome form of exchange than
cattle or grain. And while there's no official confirmation, it's
likely that the plea "Buddy, can you spare a dime?" (or
variations thereof) was uttered soon thereafter.

Today in the United States, almost everyone carries
debt: credit card balances, a home mortgage, a car loan. Borrowing
in ancient times, however, was strictly for the adventurous, with
the price of payback sometimes dangerously high.

"There was the ancient Chinese custom of a creditor
committing suicide on the debtor's doorstep to pursue him in the
afterlife. Some creditors in India still employ cross-dressing eunuchs
to embarrass their debtors into paying," says Mann. "And
there is a debt collection agency in Iowa that doubles as a motorcycle
gang, complete with leather, beards and German army helmets."

But locking up or exacting "a pound of
flesh" from deadbeats, while providing some satisfaction to
the debtor, does little to compensate for the monetary loss. Case
in point: Ancient Athens threw so many farmers into debtor's prison
that there wasn't sufficient food to feed its people.

Different rules for rulers
Then there are the wealthy and powerful. They are different and
the rules of debt have always been different for them.

Indeed, from as early as 330 B.C. when Phillip II
of Macedonia simply minted more coins to finance his conquest of
Persia, monarchs have meddled with money to pay their bills.

One popular method, called debasement, reduced the
precious metal content of coinage, putting the remainder at the
monarch's disposal. The emperor Nero started debasing coins in 54
A.D. Two hundred years later, Roman coins contained a mere 4 percent
of their original silver content.

Henry VIII also favored this revenue-generating technique,
which got so out of hand that in 1561, Elizabeth I collected all
the debased coins and melted them down, ending the practice.

Debasement created quite a dilemma for coin
makers. On Christmas Day in 1124, Henry I punished all the mint
masters at the Assize of Winchester in England by cutting off their
right hands in a novel approach to quality improvement.

There were other popular means of dealing with royal
debt:

Emperor Aurelian (A.D. 270-275) simply decreed
that the value of Roman coins were henceforth worth 2.5 times
their face value.

Alfred of England (A.D. 871-899) bumped up production
at the mint to pay for the cost of defending the realm.

Aethelred II, nicknamed "The Unready"
during his reign from A.D. 978-1016, simply tapped the mints to
pay the Vikings to stay away.

Charles I solved his cash crunch in 1640 by seizing
a mint and keeping a third of its bullion for six months.

And in the late 15th century, Spain's King Ferdinand
V and Queen Isabella used similar easy-term noble financing to launch
three westbound ships under the direction of an explorer named Christopher
Columbus. Within 10 years, his discovery of the Americas more than
doubled the size of the world known to Europeans.

Fear of the "Great Creditor"Debt arrived in the New World with considerable
religious baggage, according to historian Mann.

"Early in the 18th century, the inability to
pay one's debts was seen as a moral failure rather than an economic
one," he says. "Ministers preached that 'debts must be
paid, tho' all go for it' and addressed God as the 'Great Creditor'
who casts insolvent souls into the debtor's prison of hell. There
were no bankruptcy laws in America at the time and imprisonment
for debt was routine."

Throughout the 17th and 18th centuries, Americans
who defaulted were either cast into the local debtor's prison or
bound to their creditors as servants to work off what they owed.
But by the end of the 18th century, following decades of war and
economic ups and downs, public attitudes toward debt had shifted
markedly.

"People had learned to see debt and insolvency
as part of economic risk. They still recognized their obligation
to pay their debts, but they thought that to imprison debtors was
to treat them wrongly as criminals, and merchants and traders clamored
for a bankruptcy law," says Mann. "When Congress passed
the Bankruptcy Act of 1800, debtors imprisoned in New York threw
a party to celebrate and drank toasts to 'The Bankrupt Law, this
godlike act.'"

Debt -- and the exodus from it -- also was a significant
factor in America's westward expansion.

"British creditors after the Revolution trying
to collect pre-war debts from their Virginia debtors found that
many of them had gone to Kentucky. In the 1840s and 1850s, it was
'G.T.T.' -- 'Gone to Texas,'" says Mann.

"This experience is one reason why such states
were strongholds of populism in the 19th and early 20th centuries.
The United States enacted a permanent bankruptcy law only after
the country had run out of places where debtors could escape their
creditors."

A house of plastic cards?America gave birth to the next historic milestone
in consumer debt with the 1950 introduction of the credit card.
Its economic impact, both good and bad, remains a hotly debated
topic more than half a century later. Some predict dire consequences
similar to the Athenian farmer scenario should this house of plastic
cards ever topple.

"The biggest difference today is that credit
is aggressively marketed to people whom the creditors know cannot
afford it," says Mann. "That is why credit card companies
write off the first six months of losses from their credit card
solicitations, not as bad debts but as advertising expenses.

"Inability to repay is no longer the bar to credit
that it once was."

Mann says that while there has never been a good time
to be in debt, "the worst time was undoubtedly when debtors
could be imprisoned, which was the case in both England and America
until well into the 19th century."

"The two major improvements for debtors today
is that we no longer permit imprisonment for debt and individual
consumers have access to bankruptcy discharges, which 200 years
ago were limited only to large commercial debtors," he says.

But there is a new downside to modern consumer debt.

"Computerized record keeping and the professionalization
of debt collection have enabled creditors to be much more aggressive
in pursuing their debtors."